Economic Indicators Calculation

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					                        University of Latvia




                        Ludmila Yadchenko




MATHEMATIC MODEL OF FORECASTING OF STATE ECONOMIC
              SECURITY INDICATORS


                            SYNOPSIS

                               of the


                          Doctoral thesis
             for the acquisition of the scientific degree
                  Doctor of Economics (Dr. oec.)




              Field of science: Economics Branch of
                science: Latvian national economy




                                Riga
                                2006
                                                31
Introduction
      Today's stage of economic relations is characterized by the globalization of the factor of
social and economic and political development. The scale and depth of the influence of global
forces, that appeared as the result of fastening of scientific and technical progress and the change
of its influence character on new directions in science and manufacture, from one side,
determined the rapid development of international relations and, from the other side, stimulated
the appearance of global crisis.
      Today economic security should be considered as the most important characteristic of
economic system, that determine the ability of the realisation of national and governmental
interests, a stable working capacity of economic subjects, high living standards of population as
well as the elimination of the appearing threats for achieving these targets. Due to this reason the
providing of economic security is one of the most important functions of the government.
      Therefore the essence of economic security can be determined as the state of economic and
governmental institutions, when a guaranteed protection on national interests, a sufficient
defence potential and a range of other aspects are provided even in case of unfavourable
conditions of the development of internal and external processes.
      Economic security is the base of national security. At the same time it is closely connected
with defence security, information security, ecologic security and energetic security. In turn,
economic security is based on three major indicator groups - economic indicators, social
indicators and financial indicators.
      Economic indicators characterize economic development tendencies from the standpoint of
production efficiency as well as reflect the ability of national economy to function with
minimum dependence on the external world. Social indicators reflect the tendencies of the
development of social processes and the realization of welfare distribution fairness principle in
the country. In turn, financial indicators reflect the tendencies of finance and credit system
development from the standpoint of its correspondence to the requirements of state economic
security.
      Economic security concept has the role of an important element of the regulation of
international relation system. In the context of Latvia's integration with the European Union, as
well as taking into account the ambiguous impact of external factors, related to these processes,
economic security should be considered as a target orienting point for national economy and
governmental structures, and only the comparison of macroeconomic indicators with the
marginal volumes of economic security indicators enables to make a complex and well-grounded
evaluation of economic development in dynamics as well as to find out the positive tendencies
                                                 32
and the existing threats in order to find out the ways of elimination of theses threats and to work
out a complex of specific measures of their realization.
      Formulation of the research problem. Importance of research
      The problem of state economic security is almost not covered in the researches of Latvian
economists; the absence of a precise understanding of the content of economic security concept
as well as legal base defects in the Republic of Latvia do not enable to apply a system approach
to economic security regulation on governmental level. However, a unified approach is
necessary in order to provide national economy sustainable development and the control of
possible internal and external threats by governmental institutions.
      A unified approach to the evaluation and forecasting of economic security level in the
Republic of Latvia is worked out in the doctoral research, based on the investigation and
synthesis of international experience as well as taking into account the specifics of Latvia's
national economy, its development tendencies after regaining independence and its priorities due
to integration with the European Union. In the frames of doctoral research the most important
indicators of Latvia's economic security are forecasted as well as conclusions are made and
suggestions are worked out on the base of the forecasts and the analysis of legal base, aimed at
the increase of economic security in the Republic of Latvia at governmental level.
      The object of the research is the scope of Latvia's economic security indicators from
1995 to 2004 as well as regulatory base.
     Aim and objectives of the research project
     The aim of the research project is to work out a unified approach to the evaluation of
Latvia's economic security level as well as to forecast the most significant state economic
security indicators, using mathematic methods. The forecasting of economic security level as a
whole enables to provide the necessary base for strategically important economic and political
decision-taking for the country as well as for the working out of measures and methods of
operative correction of the existing course.
      To accomplish the aim of the research project, the following research tasks were
formulated:
     1. To determine the role and place of economic security in governmental system, based on
         international experience.
     2. To classify internal and external threats of economic security.
     3. To investigate the existing legal base of national security on the example of the
         Republic of Latvia and find out the drawbacks and defects.
     4. To analyse the modem approaches to governmental regulation of national economy and
         its role in the providing of sustainable development.
                                                 33
     5. To investigate the problems of Long-Term Economic Strategy of the Republic of
         Latvia of 2001 and The Unified National Economy Strategy of 2004 from the
         standpoint of national security in the context of Latvia's integration with the EU.
     6. To group and to analyse state economic security indicators on micro and macro level.
     7. To determine the coefficient of accordance of Latvia's macroeconomic indicators to the
         marginal volumes of economic security indicators.
     8. To research the methodological aspects and the existing approaches to forecasting in
         order to choose the better model for making forecasts.
     9. To consider the quantitative methods of factorial indicators of dynamic rows on a
         specific example.
     10. To determine an optimal time period for forecasting and to calculate confidence
         intervals.
     Theoretical and methodological foundations of the research
     The theoretical basis for the research process consists of the monographs of foreign authors
and international experience in the analysis and evaluation of economic security, the publishes
materials of conference thesis of the author, related to the subject of the research, statistical
sources of Central statistical bureau, Ministry of Economics etc., periodicals as well as several
local and international Internet resources. Due to the fact that in Latvia the problem of economic
security is almost not covered, the number of publications of the local authors is limited.
     In order to ease mathematic calculations and in order to rationalize the scientific research,
the author used the modern computer programs for business statistics processing - STATISTICA
and SPSS.
     Research methods
     In order to completed the tasks and to achieve the formulated aim of the research, both
historical development researches and international comparisons and economic science research
methods have been applied, such as macroeconomic analysis, statistical and econometrical
methods and mathematic modelling in economics.
     Limitations of research scope
     The research covers the period from 1995 to 2004. In early 90's in Latvian economy, as
well as in other national economies of the countries, that appeared on the basis of former USSR,
radical changes took place, that correspondingly reflected also in macroeconomic indicators (for
example, the rate of inflation decreased about 500 times - from 1000% to 2%). Such jump-like
changes would tamper the graphical illustrations of the statistical data, that is why the author
considers the period of stabilisation and development, not taking into account the period of
regaining independence and the starting stage of economic reforms.
                                                   34
     Structure of thesis
     The thesis consists of 3 parts, conclusions and proposals and the list of bibliography (100
units). 10 supplements are added at the end of thesis.
     The essence of state economic security is characterised in the first chapter of the thesis. The
role of economic security in governmental system and its components are determined,
governmental regulation forms and methods are classified. A classification of internal and
external threats of economic security is given. The Long-Term Economic Strategy of the
Republic of Latvia of 2001 and the Unified National Economy Strategy of 2004 are investigated
as well as the role of global organizations in the providing of Latvia's economic security is
analysed.
     The second chapter deals with the analysis of Latvia's economic security with indicators.
The methodological base of indicator analysis is researched as well as the calculation of
economic, social and financial security indicators is carried out for the period from 1995 to 2004,
that enabled to find out the main tendencies and problems.
     The third chapter is devoted to the forecasting of state economic security indicators with
the use of SPSS program. Such methods as regression analysis and extrapolation are applied.
     Original contribution of thesis author
     The original contribution of the author makes the unified approach to the evaluation and
forecasting of economic security level in the Republic of Latvia, worked out by the author, based
on the research and processing of international experience as well as taking into account the
specifics on Latvian national economy, the tendencies of its development after regaining
independence and its priorities due to joining the European Union.
     The problem of state economic security is almost not covered in the researches of Latvian
economists; the absence of a precise understanding of the content of economic security concept
as well as legal base defects in the Republic of Latvia do not enable to apply a system approach
to economic security regulation on governmental level. In the frames of doctoral research the
most important indicators of Latvia's economic security are forecasted as well as conclusions are
made and suggestions are worked out on the base of the forecasts and the analysis of legal base,
aimed at the increase of economic security in the Republic of Latvia at governmental level.
     1. In the frames of the research the evaluation of the diversity of economic security
            indicator system is carried out, the accordance of factual indicators of economic
            development to their marginal volumes is analysed, the deviations and their reasons are
            investigated as well as the hidden relations between the indicators are found out.
     2. Based on economic strategy, legal base and governmental regulation, the conclusions
            are made and proposals are worked out related to the measures that governmental
                                            35
        bodies take or should take in order to achieve the stable economic growth that
        meets economic security concept.
     3. The completion of tasks, set up for the accomplishment of the aim of the
        research, enabled to work out a unified approach to the evaluation of state
        economic security indicators, using theoretical and statistical base, as well as to
        make specific forecasts of a range of indicators.
     Practical relevance of the results of the thesis
     Based on the research, carried out in the frames of doctoral thesis, a free choice
discipline "State economic security" (32 academic hours) has been worked out and
registered. It is aimed at bachelor program students. From 2002 to 2005 the author took
part in lecturing the above mentioned discipline at the University of Latvia.
     The author of the doctoral research is also the co -author of manual "State
Economic Security" (ГУТКИН A.M., Poя Г.B., Ядченко Л.K. Экономическая безопасность
rocyдарства. /Учебное nocoбие. -Pига: Pеторика, 2002.).


                           Synopsis of the research results 1. The essence of state
national security
     In Chapter 1.1. the place and role of state economic security in governmental system
is defined. The system of national security, its elements and their contents as well as
national security as one of the key elements of national security are considered.
     The provision of state economic security is one of the most significant
governmental functions. Today the term "economic security" is often used both for the
description of the rightness of economic policy, implemented in the country, and for the
description of coming catastrophe in national economy, that endangers state security. As
a process, it is a scope of actions and mechanisms that form and improve the situation
for the providing of stable functioning of national economy in present and future..
     Stability and security are the most significant characteristics of e conomy as a
unified system. Security is the state of an object from the standpoint of sustainability and
ability of development in the conditions of the existence of internal and external threats
as well as unexpected and unpredicted factors. The more stable is economic system, the
more sustainable is economy, thus its security evaluation will be high enough. The more
stable is development, the lower is the probability of potential threats.
     The term "sustainable development" is historically connected with t he First UNO
declaration related to environmental questions (in 1972 in Stockholm) and the works of
the Rome club, where the opinions on the problems of environment and economic
and social
                                                  36
development interaction was covered. In turn, interaction was considered as the pre-condition of
the long-term progress of the society along with the maintenance of the necessary level of
ecologic aspects of life and capital multiplication.
      National security concept is wider than economic security concept, it includes defence
security, information security, ecologic security, energetic security etc. At the same time
economic security is the core of the system: when considering national security elements, most
of them have economic aspects (Picture Nr. 1).
                                                                                   Picture Nr. I
                                     National Security System
                                                  37
      In economic literature of the XX century a wide spectre of opinions on the place, role and
aims of governmental interference in economic system is reflected. At the same time the
viewpoints of scientists changed, depending on specific stages of world economy development.
Overall, the two polar pendulum swings can be mentioned: in 30-60's to the side of
governmental regulation activation; from 70's - to the increase of the regulating role of the
market and its mechanisms.
      Chapter 1.2 is devoted to the analysis of governmental regulation forms and methods as
well as its role in the providing of economic security.
     Nowadays the necessity of the providing of a certain scope of rules by the government is
generally accepted, such as law, order, the protection of private property, social and economic
stability and the stability of economic policy.
      Without a strong and elastic role of the government it is impossible to work out a balanced
course of economic development and to make strategic changes without causing social distress.
In 1997 the World Bank admitted it in its World Development Report,
      The determining function of the government in the providing of economic security is the
creation of conditions for the efficient development of market economy. The following main
elements of participation of state in the process of economic development can be emphasized:
       1. The coordination of governmental functions with its potential, i.e., "the coordination of
       • will with the abilities". Some countries, that have limited resources, try to do too much,
         but it often causes rather problems than achievements. If abilities are limited, then the
         forms and directions of state interference are to be thoroughly analyzed.
     2. The improvement of governmental potential by activation of public institutions. It
         predetermines the working out of efficient norms and limitations that enable to
         eliminate anarchy and to fight against such crimes as corruption, economic violations
         and misdeeds and terrorism.
     3. Efficient preference regime from the side of governmental bodies, aimed at the
         providing of economic systems functioning, based on the provision of goods and
         services, by setting up rules and founding institutions that enable the development of
         the markets and provide higher living standards for people.
     In order to implement the aims of its economic policy, the government applies various
forms and methods that make governmental regulation instruments. The methods of
governmental impact on economy can be direct or indirect. In turn, the direct forms of
governmental regulation are divided into administrative and economic. The indirect regulation
forms also include economic regulation methods (Picture Nr.2).
                                                  38
                                                                                          Picture Nr.2
                           Governmental Economy Regulation Instruments




      It is obvious that a stable economic development strategy should be worked out, based on
economic security threats classification. The determination and quantitative evaluation of
economic threats is impossible without classification. Chapter 1.3 deals with economic security
threats classification and research.
      There are several variants of economic threats contents suggested in economic literature
and official documents. It is possible to classify and to range threats by the character and level of
potential danger by several criterion, for example:
     •   By threat source (internal threats, that have a source in territory of the country; external
         - the source is abroad);
     •   By sphere of human activity (political, economic, social, legal, military, international
         relations, ecological, scientific and technical, intellectual, informational etc);
     •   Related to human activity (objective, that appears regardless of the set goals, and
         subjective, or conscious, such as reconnaissance and espionage, organized crimes etc.);
     •   By realization probability (taking into account the existing situation - crisis, reforms,
         opposition or collaboration);
     •   By consequences (general, that take place on all territory of the country; local, that
         reflect only in part of territory; separate, that influence only separate subjects).
                                                 39
     The characteristics of threats of personality, society and state economic interests can be
grouped by the following features:
     •   Object of threat: governmental structure, finance etc.;
     •   Nature of appearance: the factors, determined by implemented policy, competition,
         criminal motives;
     •   Amount of caused losses;
     •   Way of impact (direct threats, latent threats) and the level of economic subject's
         protection.
     Internal threats includes the inability of self-protection and self-development, low
innovation level, human capital undervaluation in value scale; the inefficiency of governmental
regulation system; the inability to find a reasonable balance of interests and to avoid
contradictions and social conflicts (Picture Nr.3).
                                                                                  Picture Nr.3
                             Internal Threats of Economic Security
                                                40


      The elimination of external threats is connected with economic development of the country
and the solution of internal problems. In general, external threats are the national strength of
other countries that include both scientific and technical and financial and economic and defence
potential. The higher is national strength of a country that interacts with the given country, the
more significant are potential threats to its national interests. The content of external threats is
not homogenous. It includes not only the possibility of military attack, but also an aggressive
behaviour of the other countries, that realise their interests in finance, economic, trade or
information sphere (Picture Nr.4).
                                                                                      Picture Nr.4
                            External Threats of Economic Security




      Chapter 1.4 is devoted to the investigation of the essence and content of economic security
strategy, the analysis of regulatory bases of the Republic of Latvia in scope of economic security
as well as the analysis of the Long-Term Economic Strategy of 2001 and the Unified National
Economy Strategy of 2004.
     Economic security strategy of a country is realised through a specific system of measures
and mechanisms, using qualitative and quantitative characteristics - economic, technological,
informational etc. The interests of providing economic security are to be taken into account when
working out budgets and laws as well as taking decisions in the scope of economic and monetary
policy.
                                                41
      Economic security strategy includes:
        -The characteristic of external and internal threats of economic security as a scope
        of conditions and factors, that threaten the vitally important criteria of personality,
        society and country as a whole;
      - The determination of economic situation criteria and parameters, that respond to
          economic security requirements, based on taking legal, economic and administrative
          measures of governmental institutions.
      Latvia's national security is based on National Security Law and National Security
Conception.
      In 1995 National Security Conception was adopted for the first time in the history of the
Republic of Latvia. The Conception describes the situation of the Republic of Latvia from
security viewpoint as well as evaluates the factors that determine security situation in the
country. The Conception is based on the understanding that not only foreign policy and military
situation influence security level in the country, but also internal factors, such as democratically
basis of the country, economic development, social security and welfare, criminal situation,
living quality etc.
      On 14th December 2000 in Latvia National Security Law was adopted. The Law defines
national security system and its elements, the competence of national security subjects, as well as
the principles and order of the coordination, maintenance and control of their activity. National
security in the Law is defined as "a state, achieved as the result of unified purposeful measures,
taken by the government and the society, country's independence, its constitutional order and
territorial integration, as well as the prospect of free development of the society, its welfare and
stability are guaranteed" (Article 1, Section 1). The accent is obviously put on political and
especially military security it is explained with the fact that this Law is actually adopted on the
basis of Defence Law, that expired after National Security Law came into force.
      On 18th June 2001 Latvia's Long-Term Economic Strategy, worked out by the Ministry of
Economics was adopted. The Strategy defines the long-term aims if economic policy, describes
the tendencies of Latvian national economy development as well as contains the analysis of
economic development opportunities and relevant risks and the formulation of the priorities and
tasks of economic policy. The Strategy describes four possible scenarios of Latvian economy
long-term development, depending on external conditions and the level of strategy realisation.
      A unified basis of Latvian economy development becomes especially topical nowadays,
when Latvia has become a full member of the European Union and gained favourable pre-
conditions for a stable and rapid growth. The Unified National Economy Strategy, adopted by
the Cabinet of Ministers on 17th August 2004, became such a unified basis. The strategy defines
                                                 42
governmental policy, aimed at stable, well-balanced and sustainable development providing,
unifying the long-term aims and priorities of economic policy (for 10 - 30 years) with the
middle-term (5 - 10 years) and short-term (1-3 years) aims and measures (Picture Nr.5).
                                                                                         Figure Nr.5
                            GDP per Capita in Latvia and in the EU




      Chapter 1.5 deals with the role of global organizations in the providing of state economic
security in Latvia.
      Along with the globalization of international economic relations the process of
regionalization takes place, which is based on the efforts of the countries, international ad
regional organizations to find the best ways to achieve maximum effect with minimum resources
in providing multilateral security on national, regional, international and individual level.
      In order to increase the efficiency of regionalization process, regional organizations are
founded. These organizations provide opportunity for population to associate themselves with
people, living in regional and global environment. International organizations are able to
decrease the feeling of fear of humans. They provide the feeling of security of being not alone in
the world, of absence of unexpected aggression, as well as provide assets for threats elimination.
Even if the other countries of the world do not provide assistance, it will be provided by global
and regional partners.
     Latvia is located in a very regionalized environment. Latvia's residents can benefit from
collaboration with the Baltic countries as well as the two most powerful regional organizations -
EU and NATO.
     The EU by nature is a security organization. It guarantees multilateral security for the
residents of its member states more than any other international organization. Today's EU is the
result of a long-term collaboration of democratic countries, where human is the main value.
                                                   43
      NATO by nature is regional organization and it serves to the security and defence interests
of Transatlantic space countries, but by its impact on different events in the world it can claim
for the status of international security organization.
      United Nations Organization is of vital importance in the providing of state security.
      United Nations Organization is the biggest and the most significant global international
institution. The number of its members has grown from 51 country in 1945 to 191 country in
2003. There is no other such universal organization in the world, both by the number of its
representatives and the scope of questions solved and its influence on international events.
      Getting prepared for its activity in XXI century, UNO formulated Millennium
Development Goals. They reflect UNO intents to solve the questions, that influence security and
safety of humans:
      1. To reduce poverty.
      2. To provide basic education for everyone as well as access to secondary education and
          professional education.
      3. To ensure equal opportunities for females and males.
      4. To reduce infant mortality.
      5. To improve mother's health.
      6. To limit the distribution of HIV/AIDS, tuberculosis and diphteritis, as well as other
          disposable diseases.
      7. To provide environment sustainability.
      8. To assist humans in less developed countries.
      In Latvia UNO structure is represented by International Monetary Fund (IMF),
International Organization of Migration (IOM), UNO Development Program (UNDP), the World
Bank and World Health Organization (WHO).
      The other two organizations, that carry out their activity in Latvia, are Latvian National
Committee of the United Nations International Children's Emergency Fund (UNICEF LNC)
and Latvian National Committee of United Nations Educational, Scientific and cultural
organization. Both are independent organizations, registered in Latvia, that support aims and
principles of UNO by their activity.
      Developing as a democratic and economically stable country, Latvia gains opportunities to
participate in the determination of the means of global threats elimination and practical solutions
by way of participation in UNO. It means that Latvia change its status from the receiver of UNO
aid to the improver of security level like developed countries of the world. When Latvia's
residents are aware of their role in world processes, their capacity to contract will increase not
only in local level, but also in regional land international level.
                                                   44


2. State security level analysis by means of indicators
     In Chapter 2.1 state economic security criteria and indicator analysis instruments are
described, based on international experience.
     The success of national economy functioning is the achievement of positive dynamic of
social and economic development.
     Each level of economic activity has its own conditions of economic growth. On micro level
it is efficient use of resources and business development. In turn, on macro level the condition of
economic growth is the optimization of economic environment, that provides the creation of
necessary stimulus for investors, taxation optimization and the reduction of unemployment.
     An integral part of stable development conception is the system of indicators, worked out
by UNO Stable Development Commission. Based on a range of national and international
proposals on working out and application of indicators, in 1995 the Stable Development
Commission adopted a program of stable development indicators introduction. Initially the
program included 130 indicators.
     Indicators are intended to be used on national level in governmental decision-taking
process. Not all of them are valid for any national economy on each stage of its development.
The country should choose indicators according to its aims and tasks. In order to ease the
application of indicators and to check their applicability, methodological guidelines have been
worked out for each indicator, that contain necessary information on the concept, role,
calculation and data sources for each indicator.
     Each of the indicators has its marginal value, which makes the alert border between the
secure and dangerous zone in national economy. The calculation of real indicators of national
economy and especially the calculation of their relation to the according marginal values gives a
detailed outstanding of the level of stability/non-stability of national economy and the main
threats. The highest possible level of economic security is achieved if all the complex of
indicators is in the frames of the according marginal values and the marginal values, in their turn,
are achieved without prejudice to the others.
      In Chapter 2.2 economic security indicators are classified. They characterise economic
development tendencies from the standpoint of production efficiency as well as reflect the ability
of production sphere to function with minimum dependence on the external world. They include
GDP, the portion of manufacturing industry in total industrial output, the volume of investments
related to GDP in percents and the portion of new production in total output (Picture Nr.6). The
above mentioned indicators of the Republic of Latvia from 1995 to 2004 are calculated as well
as the main tendencies and problems are found out.
                                               45
                                                                                   Picture Nr. 6
                      The Structure of Economic Indicators of Security




     Chapter 2.3 is devoted to the analysis of social security indicators. Social
indicators reflect the tendencies of social processes development from the
standpoint of welfare realisation fairness principle. Social indicators consist of the
portion of people with income lower than subsistence wage in the total number of
employed people, the average life expectancy, the difference between the incomes
of the 10% of the highest paid and the lowest paid employees, the number of
convicted crimes per ) 00,000 of population and the rate of unemployment (Picture
Nr.7). The above mentioned indicators of the Republic of Latvia from 1995 to
2004 are calculated as well as the main tendencies and problems are found out.
                                                                                   Picture Nr. 7
                        The Structure of Social Indicators of Security




     Financial indicators make the third and the widest one group of state economic security
indicators. Chapter 2.4 deals with analyses of financial indicators. The la tter reflect the
tendencies of finance and credit system development from the viewpoint of its accordance with
economic security requirements. The structure of financial indicators is the following: annual
inflation rate, internal debt related to GDP in percents, current repayments of internal debt,
foreign debt related to GDP in percents, the portion of external loans in the coverage of
budget
                                                46
deficit, budget deficit related to GDP in percents, the volume of foreign currency related to the
volume of domestic currency, M2X related to GDP and the portion of import in internal
consumption (Picture Nr.8). The above financial security indicators of the Republic of Latvia
from 1995 to 2004 are calculated and analysed as well as the main tendencies and problems are
found out in this Chapter.
                                                                                         8.attēls
                       The Structure of Financial Indicators of Security




     The above mentioned three groups of economic security indicators enable to evaluate risks
in Latvian national economy, that are the subject of analysis the Chapter 2.5 is devoted to. The
following factors are analysed:
     •   Population incomes.
     •   Inequality.
     •   Unemployment.
     •   Education.
     •   Rate of inflation.
     •   Demographic situation.
     •   Globalization and open economy risk.
                                                 47
     It was concluded that in spite of stable growth of population incomes in Latvia, they are
still lower than in the neighbouring Baltic countries, but the average disposable income of the
households does not exceed minimum subsistence level. At the same time the working week in
Latvia is one of the longest in the EU as well as there is significant income inequality in separate
regions and society material stratification is growing, that is characterized by Gini coefficient
and other indicators.
     According to the data of interrogation, carried out by Eurobarometer in September 2005,
Latvia differs from the other EU countries with the fact that its residents pay too much attention
to the increase of prices and inflation rate in the country. In 2005 one of inflation catalisators in
Latvia was the pegging of Latvian lat to euro at rate 1 euro = 0,7028 lats, as well as the fact of
lat's long-term overvaluation, according to the viewpoint of many economists, but in 2004 such
psychological factors as inflation expectations due to integration with the EU and expected price
adjustment were of great importance. In 2004 the growth of consumer price index in Latvia was
the highest among the Baltic countries.
     Latvia's demographical indicators are one of the worst in Europe. The most significant
feature of forecasted change of population age structure is a rapid absolute and relative decrease
of the number of children. So, in 1990 children made 22.7% from the total number of population,
but in 2005 their portion made only 14.8 and is expected to decrease in future.
     In the beginning of XXI century the number of pupils continued to decrease according to
the decrease of the rate of birth in 90's. Due to the same reason, approximately by 2010 the
number of potential students is expected to decrease. According to the expectations, by 2020 the
number of teenagers of the age of 15-19 years old will decrease twice, compared to 2000. In this
period the number of working age population will decrease significantly.
     The negative increase of population in Latvia has been negative for a long time. Also life
expectancy indicators in our country are one of the lowest in Europe.
     In Latvia the level of national savings is low as well as mineral wealth and natural energy
resources are limited, thus during transition period national economy restructurization from
prevailing manufacture to the domination of services was logical. The author emphasizes that the
development of human resources will have a growing role in providing of economic security in
long-term perspective. In turn, it means that the initiative of each individual will be of great
importance. The government can stimulate such initiative and its realization by investments in
education, scientific research and development, transport and communication infrastructure as
well as by working out tax policy, that would be favourable for private initiative, stimulation of
of public sector institutions activity as well as fair and transparent legislation and its
implementation.
                                                 47
     It was concluded that in spite of stable growth of population incomes in Latvia, they are
still lower than in the neighbouring Baltic countries, but the average disposable income of the
households does not exceed minimum subsistence level. At the same time the working week in
Latvia is one of the longest in the EU as well as there is significant income inequality in separate
regions and society material stratification is growing, that is characterized by Gini coefficient
and other indicators.
     According to the data of interrogation, carried out by Eurobarometer in September 2005,
Latvia differs from the other EU countries with the fact that its residents pay too much attention
to the increase of prices and inflation rate in the country. In 2005 one of inflation catalisators in
Latvia was the pegging of Latvian lat to euro at rate 1 euro = 0,7028 lats, as well as the fact of
lat's long-term overvaluation, according to the viewpoint of many economists, but in 2004 such
psychological factors as inflation expectations due to integration with the EU and expected price
adjustment were of great importance. In 2004 the growth of consumer price index in Latvia was
the highest among the Baltic countries.
     Latvia's demographical indicators are one of the worst in Europe. The most significant
feature of forecasted change of population age structure is a rapid absolute and relative decrease
of the number of children. So, in 1990 children made 22.7% from the total number of population,
but in 2005 their portion made only 14.8 and is expected to decrease in future.
     In the beginning of XXI century the number of pupils continued to decrease according to
the decrease of the rate of birth in 90's. Due to the same reason, approximately by 2010 the
number of potential students is expected to decrease. According to the expectations, by 2020 the
number of teenagers of the age of 15-19 years old will decrease twice, compared to 2000. In this
period the number of working age population will decrease significantly.
     The negative increase of population in Latvia has been negative for a long time. Also life
expectancy indicators in our country are one of the lowest in Europe.
     In Latvia the level of national savings is low as well as mineral wealth and natural energy
resources are limited, thus during transition period national economy restructurization from
prevailing manufacture to the domination of services was logical. The author emphasizes that the
development of human resources will have a growing role in providing of economic security in
long-term perspective. In turn, it means that the initiative of each individual will be of great
importance. The government can stimulate such initiative and its realization by investments in
education, scientific research and development, transport and communication infrastructure as
well as by working out tax policy, that would be favourable for private initiative, stimulation of
of public sector institutions activity as well as fair and transparent legislation and its
implementation.
                                                  48
3. State economic security forecasting
       The main concepts and methodological aspects of forecasting are considered in Chapter
3.1.
       The scope of means and methods, used in forecasting, taking into account the external
environment, i.e., the scope of external conditions (factors) related to the considered objects
determine the technology of forecasting. As a methodological basis of such technology, a
forecast model is worked out for each object, that enable to get information on the possible state
of the considered object in future and (or) on alternative ways of development and the terms of
their achievement. Therefore the role and content of forecasting process in the context of
forecasting object - state economic security is to be determined.
       Proceeding from the generally accepted theories of public process management, forecasting
has a determining role in the system of the providing of economic security as a binding element
between the functions of decision-taking and implementation on governmental level.
       When working out economic security level forecasting technologies, the main requirements
applicable and relevant problems are the following:
       •   The following of principles of synergy, accordance, alternativity, persistence,
           authenticity, accuracy and feasibility of working out forecasts;
       •   The orientation on the choice of normative forecasts, when the forecasted indicators are
           determined, proceeding from their dependence on the relations of factual and normative
           values of external and internal factors;
       •   The use of absolute and relative indicators, that reflect the dynamic of the changing
           values of the parameters of the forecasted objects;
       •   The determination of optimal parameters for the working out and adoption of forecasts.
       Chapter 3.2 is devoted to mathematical modelling in the system of economic security
indicators. Nowadays economic theory pre-determines the use of mathematic models and
methods both on micro and macro level. The use of mathematical approach in economy enables,
firstly, to pick out and to describe the most important relations between the variables and objects:
such complicated research of an object requires a high level of abstraction. Secondly, the
precisely formulated initial data and relations enable to make adequate conclusions, using
deduction methods. Thirdly, mathematical and statistical methods enable to get new knowledge
on the object: to evaluate the form and parameters of the relations between its variables, that
respond to the existing observations the most. The main types of mathematic models in economy
are analysed in the Chapter.
       Chapter 3.3 is devoted to the choice of the best model for state economic security
indicators forecasting.
                                                49
     Multiple regression analysis with the use of SPSS computer program is considered on a
specific example. Autocorrelation coefficients are calculated for each analysed statistical row
from 1995 to 2004. Such methods as intervals widening method, moving average method and
analytical adjustment method are applied. Functional relations between the most important
economic security indicators are found out. One specific example is considered in details, but the
calculations of the other functional relations and forecasts are given in appendix.
     Chapter 3.4 deals with specific forecasts of economic security indicators. Overall the
author considers that in future the tendencies of development of the investigated processes (that
actually started in connection with the transition to market economy after stabilisation period) in
future will remain, but the influence of a range of external factors (in particular, caused by
joining the EU) should be taken into account. At the same time, from the authors opinion, the
impact of the above mentioned factors will be stronger in middle-term and long-term period, i.e.,
mostly out of the scope of forecasting period. Not later than in 3 years (1/3 from the length of the
investigated dynamic rows) the worked out models should be reviewed for possible corrections.
     In the considered period there are almost no significant deviations of the forecasted data
from the empirical data observed, but the taken model is chosen in order to take into account the
possible deviations as possible.
     In the conditions of stable market economy the researched processes are stable enough and
the processes chosen for forecasting have a stable development tendency.
     The length of the dynamical rows the models are worked out on is determined by objective
reasons, as in the early 90's the development tendency of the investigated processes was not
stable enough (take the almost 1000% high inflation rate in 1992 and compare it with the recent
years data), therefore the author consciously chose a shorter, but a more stable development
period of the researched processes (from 1995 to 2004). The longer is the investigated period, the
higher is the level of model accuracy, thus the collection and processing of statistical data in the
coming years, possibly, will enable to work out more precise forecasts.


Conclusions and recommendations
     Conclusions:
     1. The providing of economic security is one of the most important functions of the
         government. Its strategic aim is the creation of acceptable conditions for living and
         development of personality, social and economic and political stability of the society as
         well as the preserving of state unity in order to eliminate the possible negative impact
         of internal and external threats.
                                           50
2. Economic security is the base of national security. At the same time it is closely
   connected with defence security, information security, ecologic security and energetic
   security. However, economic security is the core of national security system, as it is
   closely connected with most of its components.
3. Latvia's national security is based on National Security Law and National Security
   Conception. National Security Law is adopted on the basis of Defence Law. The Law
   defines national security system and its elements, the competence of national security
   subjects, as well as the principles and order of the coordination, maintenance and
   control of their activity. National security in the Law is defined as "a state, achieved as
   the result of unified purposeful measures, taken by the government and the society,
   country's independence, its constitutional order and territorial integration, as well as the
   prospect of free development of the society, its welfare and stability are guaranteed".
   National Security Conception describes the situation of the Republic of Latvia from
   security viewpoint as well as evaluates the factors that determine security situation in
   the country. The Conception determines the guidelines for governmental institutions by
   supporting the general security policy and working out plans and programs for separate
   branches.
4. On 18th June 2001 Latvia's Long-Term Economic Strategy, worked out by the
   Ministry of Economics was adopted. The Strategy defines the long-term aims if
   economic policy, describes the tendencies of Latvian national economy development as
   well as contains the analysis of economic development opportunities and relevant risks
   and the formulation of the priorities and tasks of economic policy. The Strategy
   describes four possible scenarios of Latvian economy long-term development,
   depending on external conditions and the level of strategy realisation.
5. The Unified National Economy Strategy was adopted by the Cabinet of Ministers on
   17th August 2004. The Strategy defines governmental policy, aimed at stable, well-
   balanced and sustainable development providing, unifying the long-term aims and
   priorities of economic policy with the middle-term and short-term aims and measures.
   The main aim is to achieve the average level of GDP per capita of the EU countries in
   the coming 20-30 years. In order to implement this objective, annual growth of GDP in
   middle-term period should make 8%. The Strategy defines more than 60 indicators, that
   are to be achieved in fixed period.
6. Latvia's residents can benefit from collaboration with the Baltic countries as well as the
   access to the two most powerful regional organizations - EU and NATO. United
   Nations Organization, which is the biggest and the most significant global international
                                            51
   institution, is of vital importance in the providing of state security in the country.
   Getting prepared for its activity in XXI century, UNO formulated Millennium
   Development Goals
7. The marginal values of economic security indicators are quantitative parameters, the
   non-following of which impedes a normal process of economic development, that
   threatens state economic security. They make a border between safe and dangerous
   zones in different fields of national economy. The level of economic security is
   evaluated by comparing state social and economic development factual or forecasted
   parameters with their marginal values.
8. Economic indicators characterize economic development tendencies from the
   standpoint of production efficiency as well as reflect the ability of national economy to
   function with minimum dependence on the external world. Social indicators reflect the
   tendencies of the development of social processes and the realization of welfare
   distribution fairness principle in the country. Financial indicators reflect the tendencies
   of finance and credit system development from the standpoint of its correspondence to
   the requirements of state economic security.
9. As the result of the analysis of Latvian national economy risks in state economic
   security context it was concluded that the main risks for Latvia are the following:
       Low average income level. In 2004 GDP per capita in Latvia remained the lowest
       in the EU and made 43% from EU average. At the same time the working peek in
       Latvia is one of the longest in the EU and income inequality in the regions and
       income polarisation in the society are growing, that is reflected by Gini coefficient,
       that grew from 0.30 in 1996 up to 0.36 in 2004.
       High rate of inflation - in 2004 inflation rate made 7.3% and, according to the
       expectations of the Bank of Latvia, in 2005 the level of inflation will be not lower
       than 6%. This indicator do not meet Maastricht criteria.
       Unfavourable demographic situation: a rapid absolute and relative decrease of the
       number of children. In 1990 children made 22.7% from the total number of
       population yet, but in 2005 their portion made only 14.8 and is expected to
       decrease in future. The portion of population of working age decreases. Life
       expectancy indicators in Latvia are still among the lowest one in Europe: 67.1
       years for males and 77.2 years for females (in 2004).
       The risk of open economy to get a sudden shock from negative development
       tendencies in international market is relatively higher compared to bigger and
       relatively closed economies. Latvia's economic security hugely depends on
                                           52
        economic processes abroad, as Latvian export makes a significant part of GDP (in
        2004 - 29.2%). At the same time, as the experience of Estonia and Lithuania, that
        have even more active foreign trade than Latvia, shows, small open economy is
        also an opportunity to achieve higher economic development tempo than closed
        economies by means of using comparative advantages.
10. Many economic security indicators are connected between each other, at the same time,
   not only the indicators belonging to one and the same group (economic, social and
   financial indicators) - there are relations between different group indicators, that have
   been found out by means of multiple regression analysis by taking consequently each
   indicator as a dependent variable.
11. As the result of analysis, functional relations, that give the most precise description of
   the dynamic of statistical data, have been found out. The author's initial assumption
   that the relation would be probably linear, was applicable only for a part of indicators:
 GDP percentage from the EU-15 average; Investments in percents
 from GDP; Number of committed crimes per 100,000 residents;
 Amount of foreign currency related to national currency; Money
 supply in percents from GDP; At the same time there are also other
 functional relations: Annual rate of inflation - second degree polynom;
 Internal debt in percents from GDP - fourth degree polynom.
12. Overall, there is a range of positive tendencies observed in Latvian national economy,
   for example, the amount of GDP per capita in percents from the EU-15 average level
   gradually increases, though it is still far from marginal value. The amount of
   investments in percents from GDP has a linear growth dynamics and at the moment this
   indicator is satisfactory. The amount of foreign currency related to national currency
   decreases, but money supply related to GDP gradually increases. A special attention
   should be paid to the rapid growth of inflation rate. In time period from 1995 to 2004
   the graph of inflation rate is similar to parabolic curve. If such dynamic continue, then
   the rate of inflation can grow even higher than it was in 2004. The data of the 1 st
   quarter of 2005 are the evident. As the result, due to high inflation tempo it is possible
   that Latvia will be unable to introduce euro as a unified means of payment in 2008. The
   forecast for the year of 2006 has not been calculated as according to the experts'
   evaluations the dynamic of inflation tempo can stabilize during one or two coming
                                          53
   years. One more negative tendency is the linear growth of the number of committed
   crimes.

Recommendations:
1. In order to realise a systematic approach to economic security regulation in the
   Republic of Latvia, the Ministry of Economy should work out Economic Security
   Conception of the Republic of Latvia. Taking into account the tight connection between
   economic security and the other aspects of national security (financial security, social
   security etc.), collaboration with other ministries and institutions (Ministry of Finance,
   Ministry of Welfare etc.) is possible and even recommended.
2. The ministry of Welfare should work on the improvement of market economy
   distribution mechanisms in order to reduce social and economic disproportions in the
   regions and society stratification.
3. At the same time, taking into account the fact that the Baltic countries are the only
   member states of the EU that have proportional individual income tax rate, the Ministry
   of Finance should consider the possibilities of progressive individual income tax rate
   introduction, at the same time raising minimum salary at least up to subsistence
   minimum and increasing the non-taxable minimum. The tax system of Ireland can be a
   positive example for individual income tax reformation in the Republic of Latvia.
4. When working out national programs for drawing up the EU structural funds, the
   according ministries and institutions should put accent on the development of such
   progressive branches as a full cycle of forestry; the production of ecological food and
   the development of non-traditional branches of national economy; scope of services;
   transit services; tourism.
5. In order to avoid an excessive budget deficit due to the inevitable growth of
   governmental expenses, the slow convergence scenario might be preferable compared
   to convergence scenario.
6. The Small Business and Crafts Council should be involved in the improvement of
   business legislation and the providing of its stability as well as when working out
   economic stimulus especially for the development of small and middle business as well
   as the companies in certain regions and branches.
7. When drawing up ERAF financing, The Ministry of Education and Science should pay
   more attention to the working out of national programs, supporting research and new
   technologies introduction projects, as well as the ones that would provide the
   development of science-intensive technology branches and high technology branches.
                                               54
    8. When working out the measures of small and middle business support, the government
        should pre-suspect the measures of export, as one of the main factors of GDP growth,
        stimulation, including indirect export stimulation, such as guarantees, crediting etc.
    9. Taking into account the worked out unified approach to the evaluation of state
        economic security level, the Central Statistical bureau should introduce the database of
        economic security indicators with systematic upgrading system, as the longer is
        statistical row, the more precise is the descriptive model and the longer is forecasting
        period.
    10. The worked out economic security indicators forecasting models are to be reviewed for
        possible corrections, using the upgraded database for a longer time period as well as,
        possibly, taking into account the factors, that are connected with Latvia's integration
        with the EU, the quantitative impact of which today is difficult to evaluate.


Author's publications reflected in thesis
   1. Yadchenko L. State Economic Security Indicators in Foreign Economy Field.
      //Starptautiskā konference Latvijas Universitātē "Application of Financial and
      Management Tools in the Real Sector" Riga, 2001. - 13 p.
   2. Yadchenko L. The Role of Geoeconomics in the Provision of Regional Security. //The
      50th Anniversary Conference in Finance and Economics, Svishtov (Bulgaria), 2002. - 11
      P-
      Ядченко Л. Методы оценки уровня экономической безопасности государства на
      примере Латвийской Республики. //International Conference at Vytauto Didziojo
      University "Integration to European Union: Creating Business Infrastructure" in Kaunas
      (Lithuania), 2002.-15 p.
   4. Гуткин А.М., Роя Г.В.,Ядченко Л.К. Экономическая безопасность государства.
      /Учебное пособие. — Рига: Реторика, 2002. — 160 р.
   5. Yadchenko L. The Model of Quantitative Evaluation of State Economic Security, Based
      on the Example of the Republic of Latvia. //International Conference at Ventspils
      University College "Information Society and Modern Business" in Ventspils (Latvia),
      2003.-9 p.
   6. Yadchenko L. Geoeconomics and Its Impact on Regional Security. //International
      Conference at Ventspils University College "Information Society and Modern Business"
      in Ventspils (Latvia), 2003. - 6 p.
                                              55
  7. Gutkin A., Yadchenko L. Financial Security as the Basis of National Seciurity.
     //International Conference at Information System Institute ,,Information Technologies
     and Management" in Riga, 2003. - 3 p.
  8. Danovich V., Yadchenko L. Economic Criminalization and State Security. //International
     Conference at Information System Institute information Technologies and
     Management" in Riga, 2003. - 3 p.
  9. Yadchenko L. National Security in the Conditions of Globalization and Integration.
     //International Conference at BMDA ,,Management Development: Partnership between
     Business and Science in the Context of Globalization" in Kaunas (Lithuania), 2003. - 7
      P-
  10. Jadčenko L. National Security from the Standpoint of Globalization and Integration
     Process. //International Conference at the University of Latvia ,,Enlargement of the
     European Union in the Baltic Sea Region: Social and Economic Challenges and
     Opportunities" in Riga, 2003. - 7 p.
  11. Ядченко Л. Модель расчета уровня экономической безопасности
     государства на примере Латвийской Республики. //Высокие технологии —
     тенденции развития. — Харьков - НТУ «ХПИ» - Алушта, 2003. - 15 р.
  12. Gutkin A., Yadchenko L. Financial Indicators of State Economic Security in the
     Perspective of Integration with the EU. //2nd International Conference at Information
     System Institute information Technologies and Management" in Riga, 2004. - 6 p.
  13. Yadchenko L. Financial Aspects of State Economic Security in the Conditions of
     Integration with the EU. //International Conference at Kauno Technologijos Universitetas
     ,,Economics & Management - 2004" in Kaunas (Lithuania), 2004. - 5 p.


Conference Presentations
  1. Yadchenko L. The Evaluation Methods of the Marginal Volumes of State Economic
     Security Indicators. Latvian Example. //International Conference at Vytauto Didziojo
     University "Integration to European Union: Creating Business Infrastructure" in Kaunas
     (Lithuania), 2002. - full-time presentation.
  2. Yadchenko L. The Model of Quantitative Evaluation of State Economic Security, Based
     on the Example of the Republic of Latvia. //International Conference at Ventspils
     University College "Information Society and Modern Business" in Ventspils (Latvia),
     2003. - full-time presentation.
                                           56
3. Gutkin A., Yadchenko L. Financial Security as the Basis of National Seciurity.
   //International Conference at Information System Institute information Technologies
   and Management" in Riga, 2003. - full-time presentation.
4. Yadchenko L. National Security in the Conditions of Globalization and Integration.
   //International Conference at BMDA ,,Management Development: Partnership between
   Business and Science in the Context of Globalization" in Kaunas (Lithuania), 2003. -
   full-time presentation.
5. Jadčenko L. National Security from the Standpoint of Globalization and Integration
   Process. //International Conference at the University of Latvia Enlargement of the
   European Union in the Baltic Sea Region: Social and Economic Challenges and
   Opportunities" in Riga, 2003. - full-time presentation.
6. Gutkin A., Yadchenko L. Financial Indicators of State Economic Security in the
   Perspective of Integration with the EU. //2nd International Conference at Information
   System Institute information Technologies and Management" in Riga, 2004. - full-time
   presentation.
7. Yadchenko L. Financial Aspects of State Economic Security in the Conditions of
   Integration with the EU. //International Conference at Kauno Technologijos Universitetas
   ,,Economics & Management - 2004" in Kaunas (Lithuania), 2004. - full-time
   presentation.

				
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